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Supreme Court 6 November 2007

R v Fodera

[2007] NSWSC 1194

Fraud & dishonesty
SENTENCE EXECUTIVE DIRECTOR OF PUBLIC COMPANY

Citation: R v Fodera [2007] NSWSC 1194
Court: Supreme Court of New South Wales
Date: 6 November 2007
Judge(s): Bell J

Background

The offender, Dominic Fodera, was the Chief Financial Officer and second most senior executive of HIH Insurance Ltd (HIH), a public company that later became the subject of one of Australia's largest corporate collapses. He was also a member of HIH's Board of Directors and served on the boards of several HIH subsidiaries. At the time of the offence, he held significant responsibility for the financial affairs of the group.

Between July and September 1999, Fodera negotiated a complex reinsurance transaction with a group of Hannover Re companies. The transaction involved two reinsurance slips, known as Hannover 1 and Hannover 2. Read on their face, those slips suggested that Hannover Re bore the investment risk under the managed fund arrangements underpinning the contracts.

Simultaneously, however, Fodera signed a set of four undisclosed side agreements (the LOC agreements), which were delivered to Hannover Re in an envelope. Those agreements fundamentally altered the risk allocation, shifting the investment risk back to HIH's subsidiary UAS. By concealing the LOC agreements from HIH's directors and auditors, Fodera enabled HIH to book an additional $92.8 million to operating profit for the period ending 30 June 1999, reflecting an accounting treatment that presented Hannover 1 as a genuine risk-transfer reinsurance contract when the true position was materially different.

  • Whether the offender's conduct in failing to disclose the LOC agreements to the HIH board and auditors constituted conduct that was knowingly or recklessly dishonest in the exercise of his powers and duties as an officer of HIH.
  • Whether the conduct was carried out with the intention of gaining an advantage for HIH, specifically a beneficial accounting treatment.
  • What the appropriate sentence was, taking into account the maximum penalty, objective seriousness, subjective circumstances, and the need to fix a single non-parole period in conjunction with a federal sentence the offender was already serving.

Decision

Fodera pleaded guilty on 26 September 2007 to an offence under section 232(2) and section 1317FA of the Corporations Law (as carried over into the Corporations Act 2001), which carried a maximum penalty of five years' imprisonment. The agreed facts established that he had knowingly failed to inform HIH's directors and auditors of the true terms and effect of all contractual arrangements connected to the Hannover Re transaction.

Bell J accepted that the offence was of significant objective seriousness. The concealment allowed HIH to present its financial position in a materially misleading way, with the $92.8 million profit booking flowing directly from the dishonest omission. The offender's seniority, his central role in negotiating and signing the LOC agreements, and the deliberate nature of the non-disclosure all bore upon the gravity of the conduct.

The court took into account the offender's guilty plea, his personal and subjective circumstances, and the fact that he was already serving a federal sentence imposed on 10 May 2007. Consistent with the applicable federal provisions governing cumulative sentences, Bell J structured the new sentence to commence on 9 November 2008, with a single non-parole period fixed to apply across both sentences.

Orders Made

  • The offender was sentenced to imprisonment for three years and four months, to commence on 9 November 2008 and expire on 8 March 2012.
  • A single non-parole period of three years was fixed, to commence on 10 May 2007 (the date the prior federal sentence commenced) and expire on 9 May 2010.
  • The single non-parole period superseded the existing recognizance release order under the federal sentence.
  • The aggregate period of imprisonment across both sentences was four years and ten months.

Key Takeaways

  • An executive officer of a public company can be found to have acted knowingly or recklessly dishonestly, within the meaning of the Corporations Law, by deliberately omitting to disclose to the board and auditors the full contractual arrangements underpinning a reinsurance transaction.
  • The advantage sought for HIH, namely a favourable accounting treatment that inflated reported profits by approximately $92.8 million, was sufficient to satisfy the statutory element of intending to gain an advantage for the company, even where the officer did not personally profit.
  • Where an offender is already serving a federal sentence at the time of a new state sentence, the court may fix a single non-parole period spanning both sentences under the applicable provisions of the Crimes Act 1914 (Cth), provided that the new non-parole period does not allow earlier release than would otherwise have occurred.
  • Seniority within a corporate hierarchy was treated as an aggravating factor: Fodera's role as CFO and his position directing and supervising others involved in the transaction heightened his culpability.
  • A guilty plea remained a relevant mitigating factor in the sentencing exercise, even in cases of serious corporate dishonesty.

Legislation and Cases Referenced

Legislation:
- Corporations Law, s 232(2) and s 1317FA (as carried over by the Corporations Act 2001, ss 1400 and 1401)
- Corporations Act 2001 (Cth)
- Crimes Act 1914 (Cth), s 19AE

Cases:
- DPP v Bulfin [1998] 4 VR 114
- Director of Public Prosecutions (Cth) v El Karhani (1990) 21 NSWLR 370
- R v Pantano (1990) 49 A Crim R 328
- R v Peters (1998) 192 CLR 493
- R v Williams [2005] NSWSC 315; 152 A Crim R 548
- Wong v R (2001) 207 CLR 584